Historically, the healthcare sector’s collection of stocks has been full of absolute winners but ironically the worst global health crisis ever has actually been bad for stock prices of some of our best healthcare companies. Why? Well, the business of beating the Coronavirus has meant governments have undermined the format upon which these companies have grown their brand, profits and share prices.
The chart below of one of Australia’s best companies and one of the best healthcare companies in the world, CSL, graphically portrays my point.
CSL Limited (CSL)
Note how the share price has gone up and down on a sideways trend, which reflects the shock developments of the first Covid-19 closure of the world economy, followed by the Delta strain and then the arrival of Omicron.
The expectation is that CSL and other businesses will see their bottom lines and share prices improve as normalcy returns over time and so these healthcare stocks look attractive to the patient long-term investor. Anyone wanting short-term ‘buy and flip’ profits might be disappointed but I expect some healthier returns from these businesses by year’s end, provided the Ukraine war doesn’t give markets a new unplayable curve ball, in the short term.
This is a summary of what analysts think is (and will be) happening for the sector:
- After the worst of the COVID-19 crisis, elective care is resuming.
- The care costs of COVID-19 are subsiding.
- Medical equipment and pharmaceutical stocks are starting to rise.
- New cost-saving and care-improving advances in medical technologies, an ageing global population and a growing middle class in emerging-market economies (all of whom will demand more extensive drug treatments and medical care over time) have to be long-term pluses for the sector.
History has shown that we play follow the leader with Wall Street plays, and healthcare is on the radar from some of the big investment institutions there, and they think valuations are looking attractive. The sector is 13% of the US stock market. As Todd Rosenbluth, head of exchange-traded fund and mutual fund research at New York-based CFRA Research has noted: “We think investors should hold at least that exposure,” he says. “Historically, health care stocks have held up during volatile times for the stock market”.
And we are in volatile times!
Remember this, over the past 45 years, the US healthcare sector has outperformed the broader market. Its earnings and total returns have outpaced the market by 2.9% and 0.9% per year respectively, since 1973. But the sector has underperformed the market by 21% since 2015 and is currently undervalued and looks primed for a bounceback.
On this criteria, I want to increase my exposure to healthcare stocks and the analysts surveyed by FNArena tell me that I’m not looking for the wrong tonic to perk up my portfolio.
Here are their predicted price-gain views on some of our best healthcare companies:
For those looking for big returns, CSL, Healius (HLS), Sonic (SHL) and Resmed (RMD) are potentially offering an 18.5% return, if the analysts know what they’re talking about!
My preference is for CSL, Resmed, Ramsay (RHC) and Sonic. This table shows how the experts see Sonic’s healthy future.
All six analysts give the company the thumbs up, price-wise, although only Morgan Stanley wants a whole pile more.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.